WEEKLY FEATURE: FanDuel, DraftKings Happy Together

A report by Bloomberg News says that the two largest daily fantasy sports sites FanDuel and DraftKings have begun preliminary talks about a possible merger. The two companies offer nearly identical fantasy games and both are waging legal fights across the country to see daily fantasy legalized. Bloomberg cited unnamed sources that said investors in both companies are pushing for a merger. Meanwhile, New York became the latest state to legalize DFS, and other states are considering it as well.

FanDuel and DraftKings are in early talks for a possible merge, according to a report in Bloomberg News.

The news service cited unnamed sources that said investors in both companies have been pushing for a merger of the two DFS giants. The two companies offer nearly identical DFS games and both have been waging the same legal fight around the country to legalize daily fantasy sports. That fight has been state by state as more than 30 states have discussed DFS legislation.

Bloomberg, however, said the talks are in an early stage and any potential deal could easily fall apart.

Representatives for DraftKings and FanDuel declined to comment on the report and later, speaking to numerous news agencies downplayed the report as speculation.

The two companies had been bringing in investments that totaled more than $1 billion each as little as a year ago, but those valuations have dropped by 50 percent since the companies began their legal battles in several states, the news service reported.

Analysts commenting on a possible merger said the timing would be right as the two companies deal with increased regulation and continue to compete against each other. In fact, it was competing advertising blitzes by both companies last September—the start of the NFL season—that attracted the attention of regulators to the industry

Paul Charchian, president of the Fantasy Sports Trade Association, told the Associated Press that transitioning players to a new, merged system would be fairly straightforward since the companies offer a similar product.

“I expect it will be a drama-free merger because of the similarities in the platforms, play and users,” he said. “We’ll have one healthy company and that’s a net positive to the industry, if it ends up happening.”

Still, some analysts point out that a merger would give a single company control of about 90 percent of the DFS industry, which could lead to even more scrutiny from federal regulators and concerns the new entity would violate federal anti-trust laws.

The most high profile of the industry’s legal battles has been in New York state, where Attorney General Eric Schneiderman ruled the games illegal and sought to have the courts shut down the sites in that state. FanDuel and DraftKings eventually agreed to stop accepting entries in New York while the state’s legislature considered DFS legislation.

In all, DraftKings does not take entries from nine different states and FanDuel does not take entries in 10 states.

New York was the ninth state where DraftKings agreed not to accept paid entries. FanDuel has ended paid games in 10 states. The two companies took separate routes in Texas.

Investors in DraftKings include Madison Square Garden Co., and the Kraft Group, which owns the New England Patriots. FanDuel is backed by KKR & Co. and Time Warner Inc., among others, according to Bloomberg.


New York Developments

In New York, a bill to legalize daily fantasy sports was sent to Governor Andrew Cuomo for his signature.

The bill declares daily fantasy sports a game of skill and not gambling, a major point of contention for the companies as they seek legalization. If not passed, the agreement between FanDuel and DraftKings and Schneiderman’s office would have expired and his office’s actions against the sites will likely proceed in the courts.

The bill, however, did have opposition in New York. The head of the state’s Conservative Party has called for lawmakers to slow down their move to pass the bills. The party is seen as small, but also influential in state politics, according to the Buffalo News.

Michael R. Long, the party’s chairman, said he opposes the legislation, but if passage is inevitable, the party wants DFS sports limited to existing in-state gambling facilities such as the state’s racinos or under-construction casinos. The current bill would allow sites to operate without partnering with any New York-based facility.

“I’m not going to be able to stop the casinos from happening,” he told the News. “We’ve already lost that battle. But why bring in outsiders from beyond New York who don’t live or work here?”

However, Long dismissed claims that the party would withhold support from GOP lawmakers who vote for the bill.

Long’s stance, however, echoes the stance of casino and racino interests in the state, which have lobbied extensively against the bill as it now stands, saying it will be a threat to their business.

Pushing for the bill were two former New York NFL quarterbacks Jim Kelly and Vinny Testerverde, who appeared at the statehouse early in the week in support of DFS.


Other Developments

In some good news for the industry, two more states have adopted DFS regulations that legalize the sites—Missouri and Colorado.

The governors of both states signed their respective bills into law making them the fifth and sixth states to pass regulations joining Virginia, Indiana, Tennessee, and Mississippi.

“When a new frontier of online betting is available at the touch of a screen, we have a responsibility to protect consumers and young people,” said Missouri Governor Jay Nixon “I appreciate the General Assembly for answering my call to bring forward common-sense consumer protection to make sure fantasy sports gaming in Missouri is operated responsibly and with accountability.”

Missouri’s new rules will take effect in August and include an annual licensing fee of $10,000 or 10 percent of revenue, whichever is lower, and a tax of 11.5 percent of net revenues derived from Missouri customers. All money raised by the state from DFS will be spent on education, according to casino.org news.

Colorado’s new law does not set licensing fees and taxes, which will be set later by the state’s Department of Regulatory Agencies. The law does set some protections for smaller DFS companies. Under the regulations only operators with more than 7,500 users are required to apply for a license. Those below that threshold must simply register with the DPO.

Both bills include consumer protection measures, requiring operators to segregate player funds from operational funds and to offer self-exclusion tools, according to casino.org.

FanDuel released a statement supporting Colorado’s regulations. Saying it offers a “light touch that does not stifle innovation or interfere with access to fantasy sports for the nearly one million Coloradans who love to play.

“We hope Colorado will be an incubator for the many innovative fantasy sports companies that are sprouting up and growing exponentially, and that the state can become a real home for this emerging sector of the tech industry,” the company said.

And in Pennsylvania, a key committee in the House of Representatives has cleared a bill that would regulate and tax daily fantasy sports betting. The vote by the House Gaming Oversight Committee, which has been studying the issue since last year, was unanimous.

Under the bill, fantasy sports operators like FanDuel and DraftKings would have to apply for a license from the Pennsylvania Gaming Control Board and pay a quarterly tax on DFS revenues.

Pennsylvania is one of several states where lawmakers have questioned the legality of DFS, which has been operating on the basis that it is a skilled game. The state attorney general’s office directed last fall that lawmakers further study the issue, and last week’s vote is a result.

As of press time, the bill had not been scheduled for debate by the full House, which is already considering several gaming expansion measures, including the legalization of online gaming, slots at airports and off-track betting parlors, and video gaming terminals in bars and taverns.

In Nevada, the Gaming Control Board unanimously approved licensing Vic Salerno’s US Fantasy for daily fantasy sports (DFS) wagering, making it more likely Nevadans will play DFS in the fall.

The board unanimously approved an off-track, parimutuel sports operator’s license application during its June 8 meeting, but the Nevada Gaming Commission must now OK the license.

If the Gaming Commission gives its okay, US Fantasy can use a parimutuel wagering platform to operate paid DFS events in Nevada.

That would enable Nevadans and others in the state to wager on football and baseball DFS contests in the same manner that people now wager on horse racing.

Salerno anticipates about half of his potential clientele would be millennial-age bettors, and legalizing DFS would bring in a lot of new players.

If so, that means Nevada is poised to shatter its recent record $4.2 billion betting handle in 2015, which is expected to near $5 billion this year.

With DFS added to the mix, the $5 billion mark easily should be surpassed.

Like many states, Nevada regulators last year determined paid DFS contests involve risk, are a form of unregulated gambling, and banned them.

That locked DFS pioneers FanDuel and DraftKings out of the state for paid contests, while enabling existing Nevada gaming operations to seek regulatory approval to run their own contests.

That Salerno’s US Fantasy could become the first licensed operator in Nevada is not surprising. Salerno has more than four decades of experience in sports betting and pioneered the use of betting kiosks and mobile sports wagering in the state.

Finally, a study commissioned by the Fantasy Sports Trade Association found that participation in fantasy sports has climbed to 57.4 million players. The research was conducted by Ipsos Public Affairs and released today at the 2016 FSTA Summer Conference in New York.

The study marks the highest number of players recorded in the history of the study and a nearly 1 percent increase over last year’s participation.

Other findings according to a press release from the association include:

• In 18 states surveyed, 61 percent of consumers support a law that makes playing fantasy sports for cash prizes legal

• 54 percent of consumers would cancel a league supported media service if not for fantasy sports (TV channels, satellite service, apps, etc.)

• Mobile and other emerging platforms (i.e. gaming consoles, internet-connected TV) continue to grow as the predominant way (61 percent) players consume fantasy.

• 55 percent of players admit they are playing more fantasy sports due to technological innovations including the ability to play on a mobile device

• Not only are more people playing, but players are managing more teams as the average number of teams managed per player increased from 5.8 last year to 7.0

• Fantasy players are more interested in sports because of fantasy, with 64 percent reporting they are watching more live sports because of fantasy.

• The number of players who play some form of daily fantasy sports has increased from 31 percent in 2012 to 64 percent.

• 82 percent of all players play in a season-long league; just 19 percent exclusively play daily formats; and 17 percent play both formats